In the case of:- IL Jin Electronics (I) Pvt. Ltd. Vs. Asst. Commissioner of Income Tax [ITA No. 438/Del/2008]
Facts of the Case
- Established in September, 2001, IL Jin Electronics (I) Pvt. Ltd. (IL Jin/ Taxpayer) is engaged in the business of manufacturing & selling printed circuit boards for consumer durables. It commenced commercial production in January, 2002. During FY 2002-03, for its operations, the Taxpayer entered into various international transactions (See Note 1 below) with its AEs, with the bulk of international transactions being that of purchase of raw material.
- Out of the total raw material consumed, imported raw material constituted of 45.51% and the rest was indigenous raw material (i.e. 54.49%).
- Based on the transfer pricing study, Transactional Net Margin Method (TNMM) using net profit margin on sales (NPM) as a profit level indicator (PLI), was selected to be the most appropriate method to evaluate the international transactions. Thereafter, on a basis of a comparable search, the Taxpayer had selected 8 comparable companies with an arithmetic mean margin of (1 1.12)%.
- During the audit proceedings, the TPO objected to two of the com parables, namely Hyderabad Flex tech Limited (HFL) and Sanmar Micropak Limited (SML), which had high negative net margins. Finally, post discussions with the Taxpayer, HFL & SML were rejected by the TPO due to the reasons given below:
– HFL: was rejected as the Taxpayer itself stated that the same was not considered for calculating the average margin on a single year basis.
-SML: was rejected as it had negative net worth and high negative margin during the relevant year.
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